Last week, the Associated Press ran a feature story chronicling recent woes of small investors burned by the implosion of master limited partnerships (MLPs). As the AP reported, brokers steered “Mom and Pops” to MLPs promising them “fat payouts.” As many of you already know, this story doesn’t end well.

While the AP misses the mark on many MLP nuances, it does get a few things right. In particular, that these energy partnerships “borrowed heavily” and were “running big risks even when oil was twice as high.”

For the record, Hedgeye Energy analyst Kevin Kaiser was among the first (and certainly most vocal) analysts warning about the dangers of MLPs. His non-consensus research has been unrelenting in questioning the dubious accounting practices of many MLPs. He held his ground and stuck with his conclusions, even in the face of the overwhelming majority of Wall Street analysts – on both the buy and sell sides – who didn’t even bother to dig for facts, but assiduously retold managements’ version of the numbers.

In a research note, written in May 2014 well before the MLP blowup, Kaiser recalled laying out his short case during a meeting with seasoned money managers who knew little about MLPs beyond their tax-exempt status and high current yields:

“I traveled to Omaha, Nebraska two weeks ago to pitch the bear case on Master Limited Partnerships to a group of value investors. Buffett couldn’t fit me into his schedule, but I was lucky enough to meet with seasoned money managers cut from the same cloth… So I walked through a few of the more surreptitious aspects of the [MLP] story: the enormous “incentive” fees that many MLPs pay to their General Partners; the conflicts of interest and limited fiduciary duties; the gimmicky accounting; the serial capital raising; and the valuations.”

Another excerpt:

“It’s been said that there are no new eras, only new errors – most things in finance are cyclical. We look at the fees that some of the largest MLPs are paying to their GPs today and wonder if this time will be different. How long can a business that pays two-thirds of its income to its manager survive?”

At one point during his presentation, an audience member chimed in, “The whole thing seems like a big Ponzi scheme to me.” Kaiser didn’t disagree, simply replying that his compliance officer preferred that he not use that language.

Take a look below at Kaiser’s short calls on MLPs (and the company's performance versus the Alerian MLP index):

*Data through 11/02/2015. Price only, does not account for distributions.

Clearly, being long MLPs has been a costly bet for investors. According to the AP’s story, in the past year, investors have lost $20 billion in publicly-traded drilling partnerships, or $8 of every $10 they had invested. It gets worse.Add in the bonds sold by these partnerships to investors since 2010 and the losses total $57 billion.

YTD PERFORMANCE UNEQUIVOCALLY RED FOR MLPS

Sadly, many of these misinformed investors will never recoup those losses before retirement.

For the record, when Kaiser was warning investors and making these calls, many people were defending MLPs in earnest. One in particular was Kaiser’s short call on Linn Energy (LINE) which may ring a bell for anyone who has been following this unfolding train wreck.

Kaiser’s well-reasoned short case on LINE drew a lot of attention, especially from CNBC’s equity market mouthpiece Jim Cramer and hedge fund manager Leon Cooperman, a Linn shareholder who came to the stock’s defense in a letter published in Barron’s.

There was also Business Insider, which as you can see in this article here, clearly missed the mark, siding with Cramer and LINE bulls. Incidentally, we were actually forced to write a piece defending our firm after Jim Cramer accused us of orchestrating a bear raid on the company.

*Sigh*

What a difference a year or two makes.

Take another look at the table above. The relevant tickers for Linn are LINE and LNCO. You can make up your own mind about who got the call right.

* * *

Editor’s Note: Kaiser’s most recent short call is Genesis Energy (GEL). A full listing of Kaiser’s energy research is available upon request. If you’d like to learn more about how you can subscribe to his research as well as our other institutional research, please email sales@hedgeye.com.

4Q15 SENIOR LOAN OFFICER SURVEY | SIGNS OF A SLOWDOWN

Takeaway:The Fed's Senior Loan Officer Survey is a useful tool for gauging where we are in the credit cycle and it just inflected negatively.

C&I and CRE Results Turn Negative

The Fed released its 4Q15 Senior Loan Officer Survey yesterday afternoon. The survey was conducted between September 29 and October 13 and covers lending standards and loan demand across business and consumer loan categories.

The survey results turned negative for both C&I and CRE lending. Residential mortgage lending standards were mixed. Consumer lending showed the most positive results; a net positive percentage of banks continued to report easing consumer lending standards, and demand for those loans increased.

Here are the two main takeaways this quarter:

1. The net % of banks tightening C&I lending standards turned positive in 4Q15. Just to be clear, this is a bad thing. 7.3% of banks, net, tightened C&I credit standards for large and medium firms in 4Q15. This is only the second time since the last recession that a net positive percentage of banks tightened standards; the last time banks tightened was 1Q12, when 5.4% tightened C&I standards for large and medium sized firms. Moreover, 1.4% of banks, net, tightened C&I credit standards for small firms in 4Q15. As the chart below shows, tighening standards have preceeded and arguably been a proximate cause of the last two recessions. That being said, there have also been a few false positives, such as 1Q12, 1Q96 and it's debatable whether the surge in tightening that accompanied the late-1990s Asian Financial Crisis and LTCM was in fact a false positive or not.

At a minimum, the takeaway is fairly clear: lending standards tend to autocorrelate across the cycle and when they roll from net easing to net tightening it's something investors must take note of.

While somewhat obvious, it's nevertheless worth stating that this could be the inflection point signaling that Financial equity prices are at or near their peak. Unlike the prior positive tick in 1Q12, this time the economic cycle is showing many signs of being late stage.

The chart below looks at the historical C&I lending standards (LHS) juxtaposed against the S&P 500 Financials Index (RHS). C&I lending standards have historically begun tightening coincident with or ahead of peaks in Financial equity prices. We've highlighted in green the periods during which Financials stocks have risen. In the 1990s it was clear that lending standards were tightening by late 1999, suggesting the roll was near. In the 2003-2007 period standards began to tighten in 2007.

2. CRE Tightening. Commercial real estate lending also saw standards tighten in the quarter. The tightening was across all three categories: C&D, Nonfarm Nonresidential and Multifamily. Unfortunately, the survey format changed with the 4Q13 survey when they replaced the single category of CRE loans with the three aforementioned subcategories. As such, it's not possible to compare apples to apples historically. That said, in the 9 quarters since the new format began, this marks only the second (and second consecutive) quarter in which standards have tightened on C&D loans. It marks the first quarter in which Nonfarm Nonresidential loans have seen standards tighten. The Multifamly category has been bouncing between easing and tightening over the last two years so we take this quarter's net tightening with a grain of salt.

A Quick Review of the Senior Loan Officer Survey by Category:

C&I: The Canary In the Coal Mine

Two quarters ago, we called out C&I as a potential canary in the coal mine. That's because the net percentage of lenders tightening standards was almost back to the zero line. That percentage then eased back in 3Q15. However, 4Q15 appears to be the confirmation; the net percentage of banks tightening standards for loans to large firms moved past zero to +7.3%. Additionally, +1.4% of banks tightened standards for C&I loans to small firms. This could mark the end of the 6-year bull market for Financials equities.

CRE: Tightening Across the Board

After C&D lending saw a moderate 1.4% of lenders tightening standards in 3Q15, banks are now tightening standards for all three CRE categories in 4Q15. This inflection in CRE standards adds to our concern over the inflection in C&I standards.

Meanwhile, demand for all three categories of CRE loans increased in the fourth quarter.

Residential Mortgage: Mixed

Starting in 1Q15, the Federal Reserve broke the survey's residential Prime and Nontraditional categories into six new categories and kept the Subprime category for a total of seven different categories. The six new categories include: (GSE-Eligible, Government, QM non-jumbo/non-GSE eligible, QM jumbo, Non-QM jumbo, and Non-QM/non-jumbo). The categories we're most interested in are the GSE-Eligible (Fannie/Freddie) and Government categories (FHA/VA) since these two categories account for ~90% of all origination volume. The GSE-Eligible category showed 13.8% of banks, net, eased standards Q/Q in 4Q15.However, Government showed a 5.5% net tightening. 20% of banks also tightened standards for Subprime loans. Three of the other four categories eased while one was unchanged.

We pay little attention to the demand component of the Fed's Survey because it reflects shifting refi demand and isn't a good barometer for purchase activity. Nevertheless, we include both charts below.

Consumer Loans: Easing

Standards for credit cards, auto loans, and consumer loans ex-cards and autos all eased in the third quarter.

Joshua Steiner, CFA

Jonathan Casteleyn, CFA, CMT

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BLMN | CAN YOU TEACH AN OLD DOG NEW TRICKS?

Last week we released a note on BLMN, previewing the quarter as well as introducing the STEAK TRACKER. Our core thesis on BLMN is that they need to divest non-core assets and focus on the core concept, Outback. This point was especially evident in this quarter as they lacked innovation and for the third year in a row rolled out a steak and unlimited shrimp promotion that did not resonate with consumers this time around. Traffic ended down -0.9% in the quarter for Outback, evidence that this lack of attention is not sustainable long-term.

During the call management spoke to sweeping remodels across the Outback system, renovating the exteriors of all stores over the next three years. The conviction in this initiative is the result of positive tests at 33 trial stores which showed 5% sales growth post remodel. Additionally, to our liking, management is focused on international growth. Outback Brazil had comp growth of 6.9% and Korea had traffic growth of 13.8% in 3Q15. BLMN is focused on investing “significant capital” in Brazil and looking for expansion opportunities across the world in areas such as the Middle East, China and Australia.

Even with this, we are still bearish on BLMN until they decide to divest non-core assets. Multi-concept casual dining restaurant companies in our eyes are destined to fail, as proper capital allocation is difficult to preserve.

THE STEAK TRACKER

Outback SSS trend continued in line with what we were seeing in the steak tracker heading into the quarter. The correlation between Outback US SSS and Men Employment 55-64 YOA tightened in the quarter from 0.72 to 0.74. This specific tracker has been dependable in predicting the trend of Outback SSS and we continue to grow more confident in it.

Our other trackers, the more long term in nature, CPI – Uncooked Beef Steak and CPI – Beef and Veal, held up well. Although, the correlation decreased slightly, we are using them for trends not quarterly ebb and flows and those remained accurate.

3Q15 FINANCIAL RESULTS

BLMN reported revenue declined 3.6% YoY to $1,027mm versus consensus estimates of $1,035mm. The top line miss was driven by bad same-store sales growth for all concepts. Outback US SSS increased 0.1% versus consensus estimates of 1.7%, a 470bps YoY decline. Bonefish reported SSS of -6.1%, 80 bps below consensus estimates of -5.3% and a 870bps decline YoY. Carrabba’s SSS came in at -2.0%, 310bps below consensus estimates of 1.1% and representing an 80bps decline YoY. Restaurant level operating margins improved 70bps in the quarter to 14.5% in-line with consensus estimates. Moving to the bottom-line BLMN was able to translate a top-line miss into a bottom-line beat, reporting EPS of $0.15 versus consensus estimates of $0.14.

MANAGEMENT GUIDANCE

Management reaffirmed full year EPS guidance of at least $1.27. The company revised blended US comp growth to be 0.5% to 1.0% versus prior guidance of “approximately 1.5%”. Total revenue guidance was shaved slightly, to approximately $4.37bn down from approximately $4.43bn.

Looking to FY2016, management expects EPS growth of 10% to 15%, with positive SSS in the U.S. Additionally management is calling for commodity basket inflation of approximately 1%. This number is variable depending on how beef shakes out through the course of the year.

FY 2015 Guidance - RevPAR guidance top end lowered due to a larger leisure component in November and December. Comps are very hard in November and December (RevPAR in mid to high teens for both months).

2016 view of strong future has not changed. 100k more room nights currently booked vs. the same period a year earlier. (10% more YoY)

Exploring opportunity to expand more group space and also look into options to expand the transient side of their business.

Transient rate increase have been positives and they are postioned well for the transient segment in 4Q

Albeit slower, economy still growing, they maintain their positive views based on their group demand.

October has been the best october ever, generating $100M, October RevPAR +16% across the portfolio and 13% in total RevPAR

85+% in consolidated OCC for October

Cite markets concern with REIT's ability stay attractive amid possible rate rises. They are not concerned with their ability to boost their dividend, and very bullish on the properties they own.

Q&A

100% of additional room nights booked are all corporate groups. Have good connection with their hotel managers (Marriott).

Marriott aids their transient and group segment.

Not seeing an influx of lower rated groups, most of their focus on higher rated groups

Nashville market transformation is incredible, leisure and group demand continues to be very strong. Would consider adding more rooms in the future, but most likley as a standalone property instead of adding on to Opryland.

Attrition spike not concern: reasons were group specific issues, smaller groups that were likely first term groups who underestimated costs etc., and finally there was a large group that had to shorten their stay due calendar shift.

They conducted deep dive analysis on the group attrition and found no parallels to 2008 trends

Very little energy related group exposure, less than 5% of group is energy related. Continue to very bullish on the Dallas property due to visibility into 2016

Groups set new records for spend levels, outside the room spending levels at record levels, but still a lot of room to run for other clients

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